What Is ERP? How It Helps You Accelerate Growth and Profit

One of the amazing aspects of this fourth industrial revolution is that there is a software solution for nearly any issue under the sun.

And the development of Enterprise Resource Planning (ERP)  has strived for an almost utopian ideal: the consolidation of all business solutions under a single software system.

In essence, ERP systems exist to bring different people, departments, data, and processes into one easily accessible place. For a modern organization, it means a greater ability to calculate and predict crucial elements of business, such as profits or spending for an upcoming year. 

With the diffusion of technology allowing for increasingly complex systems to enter mid-level and local markets, the adoption of ERP systems is on the rise. In the present times, ERPs have become far more accessible and easier to implement and use.  

In this guide to all things ERP, we’ll discuss the different components of ERP software, how it benefits your business and fundamental considerations for implementing these complex systems.

History of ERP

Due to the much-discussed complexity of ERP systems, it’s important to anchor any discussion toward the various stages of its development and the changes that accompany this evolution. 

The history of ERP takes us back to the 1960s when it was used as rudimentary inventory management (IC) system in the manufacturing sector. The systems were used to track the baseline supplies of raw materials and finished products against consumer demand. These early IC systems were often developed in-house by individual companies in order to address their particular needs.

It wasn't until the 1970s that something resembling our modern software solutions began to take shape in the form of Materials Requirements Planning — MRP — Software.

MRP systems applied early computational machines to the manufacturing elements in order to achieve a then-unprecedented level of coordination between procurement, manufacturing, and delivery of finished products. Later, these systems began to incorporate other departments under its umbrella, such as HR and sales, in order to fine-tune the production schedules for the company further. 

The real leap that pushed MRP software into the realm of true ERP software was the full integration of every department in a business along a backbone of financials and accounting.

Ultimately, MRP software and even the early IC systems aimed to track costs and maximize profit. This principle led to the incorporation of accounting software as the core of the ERP system. 

Since then, ERP has moved towards the software as a service (SaaS) model that uses the cloud in order to deliver the benefits remotely. This eliminates the need for pricey investments into infrastructure or IT staff that has historically limited the software to larger companies. 

Finally, there has been a recent push for adopting artificial intelligence (AI) and integrating the Internet of Things (IoT) in ERP systems. These trends are still fairly new but promise exciting possibilities for the future of ERP.

How does ERP work

ERP functions as a single source of truth for the many disparate workflows that make up business operations. ERP systems streamline the data collected from all over the company into a single space, usually a curated dashboard, where everything from finances, production quotas, and inventory can be seen and analyzed.

Standardizing functions, data, and definitions across the entire enterprise-- some of which transcend linguistic and national barriers -- is the core intention of these systems. 

This allows ERP solutions to act as central hubs for the different workflows from all parts of a business. It ensures appropriate alignment between departments and allows for easier compliance protocols, predictive analysis, and financial forecasting.

ERP has also proven to be a powerful tool for avoiding data duplication and ensuring that every department works on up-to-date information.

Who are the primary users of ERP systems

ERP systems are primarily used by manufacturing and distribution companies; however, they can be useful for many other types of businesses as well. 

The background of ERP systems has certainly influenced how it’s broadly used; accounting, operations, and manufacturing departments will be the go-to for ERP as they are the direct inheritors of the technology.

Production managers often use ERP systems to identify demand quotas and decide on how much and what type of raw materials need to be sourced in order to meet these goals. In addition, operations departments such as warehouse management and procurement frequently use ERP systems to track inventory and coordinate any and every logistical demand of the business.  

However, this by no means should imply that ERP software can’t add incredible value to teams all over a company. Having a centralized database can work wonders for developing new products and service offerings that better meet the demands of the market.

Example of ERP in business

Consider a company in the food and beverage industry that sources ingredients from different farms across the country and packages them for mass distribution.

ERP software would be incredibly helpful in tracking the purchasing of raw materials and ensuring total transparency and accurate reporting. ERP makes it easy to compile all the data about every aspect of the process—from raw material collection to production and distribution.  

More so, ERP solutions can be tailored to fit the strict regulations surrounding this industry to ensure that the products being delivered to the public comply with the laws that shape this particular industry.

Importance of ERP

The primary reason why a business should use an ERP system is to centralize all business processes and data into one core repository of information.

This reduces reporting and operational errors caused by a lack of integration between departments and produces powerful analytical data to provide leadership with insight into specific initiatives. This setup increases productivity in the workforce and even aids in the research and development of new products.

While ERP historically emerged out of a necessity to coordinate massive enterprise-level manufacturing organizations, it has applications far beyond these specific ventures.

For example, a small business owner might consider using an ERP system to help them gather data about internal resources through the supply chain and production modules. They can also look into external resources, such as customer relationships, in order to help them develop a strategy to grow and scale their business. 

A product development team might look at the data from historical sales to better understand what their consumer base is looking for and work on it. 

Additionally, company management can use powerful analytic tools to streamline spending and identify areas needing optimization to reduce unnecessary costs.

Types of ERP systems

When it comes to selecting the best software for your business, the industry in which you work will probably have the biggest impact on what software you buy. This holds especially true with expansive systems like ERP, which generally benefit from having modules and applications that are tailor-fit to the needs of an organization.

While the core functionality of all the iterations in ERP solutions generally remains the same, there’s a huge amount of variation between systems when it comes to accessibility and industry-specific modules that makes or breaks your experience with the software.

However, this doesn’t mean you’ll always need to find the most niche or expansive ERP system to cover your needs. Some industries that require particular knowledge, such as accounting, may be just fine using a basic or broad-spectrum ERP system. This variation in system models is a key way ERP is differentiated from software solutions like customer relationship management (CRM). Check out ERP vs. CRM to learn more about the two software's differences.

1. Types of ERP by organization size

ERP software services four different types of clients. While this generally refers to a company's relative size, it also distinguishes between private business and government contracts. 

Enterprise ERP

As the name suggests, enterprise ERPs are designed for large global organizations with complex operations, a large number of employees, specific requirements, and a need for advanced functionality. These ERPs handle a large amount of data from different departments and use advanced technologies like machine learning (ML) and AI. They can be deployed on-premises, on the cloud, or in hybrid settings.

Mid-market ERP

Midmarket ERPs cater to large organizations with standard operations, hundreds of employees, and basic requirements with a few modifications. These systems are more advanced than small-business ERPs but cheaper compared to enterprise ERPs. Due to a lack of dedicated IT teams in many medium-sized organizations, SaaS solutions are highly preferred, although these, too, can be deployed on-premise, on the cloud, or in a hybrid setting. 

Small business ERP

Developed for small businesses with limited resources and requirements, these systems are generally affordable, easily implemented, and user-friendly. Small business ERPs have core functions like accounts management, human resources (HR), and CRM. Cloud- deployment is common with these systems for quick installation and scalability.

Government ERP is another type of ERP system specifically built for federal, state, and local government requirements. Speciality ERP systems, like OpenGov, are made for local, state, and federal government employees.

2. Types of ERP by software deployment

When it comes to actually using software, the way in which it is deployed (delivered from the programmers and manufacturers to the vendors and into the hands of the end-user) has become an increasingly relevant factor when it comes to selecting the right piece of software.

On-premise ERP

On-premise systems refer to the ‘traditional’ style of software deployment, where the program is manually installed on the local computers and servers owned and operated by the company itself. This type of ERP deployment requires a capital expenditure (a hefty upfront cost) to buy a program license, which then gives the end user total control over the system.

However, total control also entails total responsibility, meaning it’s up to the end-user to supply security and maintenance on their hardware systems and provide security and troubleshooting to the individual users. This can generally take the form of a large in-house IT team but can also be outsourced to trusted vendors. You might want to consider an on-premise ERP system if you are looking for software flexibility, data control, and data security.

Cloud ERP

Unlike on-premise ERP, cloud ERP is much cheaper upfront. which allows specialty cloud ERP systems like OpenGov to create a secure system for government and municipality employees. However, these software solutions are usually delivered as part of an ongoing monthly subscription service for continued access to the software, security, and new features.

A cloud ERP system might be the right choice for you if you have a smaller business, want to get the latest features without investing a lot of money upfront, and need to access any data on the go.

Hybrid ERP

These solutions offer what’s known as a “two-tier” approach wherein the backbone of the system (financials and accounting) are hosted on sight and other modules are delivered remotely based on departmental need. That way, everyone has access to the same overall database, but there is less of a need for each department to have access to the full suite of your systems’ capabilities.

These works by having companies operate business-critical modules and features with specific technical applications on-premise while gaining the added advantage of cutting-edge solutions from cloud-based vendors. You might want to consider a hybrid ERP system if you’re already using on-premise ERP and need control over core processes with up-to-date industry-specific modules.

3. Types of ERP by system model

It’s very common to find some ERP systems that specialize in a particular element of a niche industry—food production and delivery is an obvious example—being used for specific modules while other, more general systems pick up the slack in other areas.

Best-of-breed ERP

These systems provide multiple module options and improve the operations of several industries. However, all pieces of a single product must be purchased as one semi-comprehensive system.

With ERP, as with many things in life, you get what you pay for. Best-of-breed systems are generally highly tuned and afford a higher level of quality than other system types. This ERP system might be right for you if you need a wide range of features and want to access best-in-class functions tailored to specific departments in a quality system. Despite these considerable advantages, a best-of-breed ERP can be rigid, inflexible to customization, and complex to use and integrate.

Modular ERP

Modular ERP systems allow end-users to cut down on the costs of implementing an ERP system by only buying the parts they need without any of the extra bloats that can be found in larger, packaged ERP systems. These systems are generally synonymous with what is known as vertical ERP or Industry-Specific ERP, given their nice applications.

You might want to consider implementing a modular ERP system if you work in a specialized industry, handle highly sensitive information, and want to reduce the overall software spend. Some potential drawbacks of modular ERP systems include lack of coordination, unsupported cloud deployment, and difficulty management for large companies.

ERP suites

A full “ERP suite” is identifiable through the fusion of several other smaller modules into a full system that can take on the role of a “true” piece of ERP software. 

This can be anything from an independent piece of accounting software to specialized supply chain management tools that are tailored to a specific industry. Generally, though not always, this functions by having certain software vendors act as “partners” to produce a single solution for a very specific clientele.

Interestingly enough, this can include partnerships between best-of-breed vendors and more niche developers in order to create systems for specific industries, causing a company to be both a partner and a competitor to some ERP suites.

You might want to consider ERP suites if you need broad functionality along with specialized modules. An ERP suite might not be the best idea for your organization if you have a small business or can work with a general ERP system.

Modules of ERP

ERP systems contain a multitude of different functions. However, these can generally be split into two distinct categories: back office (sales, marketing, HR, etc.) and operations (production, distribution, procurement, etc.).

It might seem counterintuitive to label sales as ‘back office,’ however, ERP systems draw distinctions between the management of people and customers versus the physical production and distribution of goods instead of basing their structure on the proximity of a particular department to the end customer.

1. Back-office modules

The back-office elements of ERP are generally situated around an accounting system but include other essential business functions such as HR and sales as well. These functions can vary widely based on industry and vendor but generally include everything not pertaining to the direct creation and management of a business’ end product.

• Accounting. A robust accounting system is the backbone of ERP software. It includes features to manage multiple charts of accounts and the ability to process payments, purchasing invoices, and sales. These modules can also generate financial statements and assist with monthly and yearly financial close management. Regardless of the system type, features like accounts payable, budgeting, and cash flow management are available.
• Human resources (HR). The exact nature of HR integration can vary wildly for different ERP solutions. While essentials like payroll processing are the baseline for these systems, some have entire HR management systems built into them with the capability for benefits administration, recruiting, and even workforce scheduling.
• Risk and compliance. Manufacturing is a complex industry, full of delicate machinery that can quickly lead to dangerous conditions for workers without proper planning. Luckily, ERP software helps with tax compliance, permission features for employees, and safety applications to ensure full insight and control into this crucial element of business.
• Sales. Sales features will, on average, include basic customer contact management as well as the ability to manage sales orders. This aspect of the ERP solution tracks a sale all the way through its lifecycle, beginning with the initial quote or proposal and terminating with the final invoice. Some ERP systems include full CRM software, though this is not the norm across the industry.
• Purchasing.  Alongside accounting, a powerful purchasing module is the hallmark of a good ERP system. It is a critical component for manufacturing and distribution companies that are looking for a way to strike the right balance between consumer demand and the acquisition of raw materials necessary to meet it.
• Analytical suites.  A good ERP system can quickly compile analytical reports on all the modules contained within a specific solution. This helps translate the overwhelming amount of data that a single system contains into something more readily accessible for executives and managers.

2. Operations modules

A company’s physical inventory is one of the crucial resources that, alongside financials and accounting, is at the heart of what makes ERP software so valuable. This branch of functionality coordinates and manages the physical inventory of a company, though it can vary greatly from industry to industry.

The parts of ERP software that fall under the operations umbrella include inventory management, supply chain, procurement modules, and the coordination of product distribution, often across several locations.

• Project management. Tracking, managing, and assigning tasks in a single location is crucial to conducting day-to-day operations. ERP allows for the integration of project management with all aspects of the business, affording unparalleled insight into various workflows. 
• Production. These modules create production schedules and identify the quantities of raw materials and labor required to fabricate the end product. ERP systems also define the production structure, that is, what materials are required for production, in what quantity, and how the cost of each is aggregated into the final calculation of the overall cost of the business. 
• Warehouse and inventory management.  Picking, packing, and shipping are crucial to getting the products to the end consumer. ERP software uses manufacturing operations management (MOM) software to coordinate delivery. In doing so, it provides insight into the relative value of an organization’s physical inventory, which a company uses to identify the demand for specific products, further influencing production quotas.
• Supply chain management. ERP systems include supply chain management software that can range from the bare necessities to fully-built systems in their own right. It is used to coordinate the transportation of raw materials to production sites and bring finished products out into the market. With the additional functionality of ERP software, supply chain management becomes a powerful tool for demand planning.

ERP features

ERP offers organizations a bundle of features and benefits, like the connection of workflow between different departments and the automation of multiple processes. These features help companies scale their business, reduce costs and operate more efficiently. 

Although certain components can be customized as per requirements, some common features are mentioned below.

• Business process integration. Having a bottleneck — a problem in one department that slows down the entire business — can be disastrous for your organization. Luckily, the end-to-end integration afforded by ERP demystifies the process and provides insights into what parts of the process are working optimally and where an improvement could be made. This enterprise-wide unifying of business processes increases visibility and productivity and saves time and money in the long run.
• Common database. Being able to react to changes in the market is a crucial ability of every business, regardless of industry. Having a single database affords you insight into internal metrics, such as procurement, and external data, like customer relationships and sales leads. When one changes, it will almost certainly affect the other so that businesses can react in real time.
• Data analysis. One of the biggest headaches for managers and executives can be trying to pull different sets of data from far-flung departments that have little incentive to talk to one another. Oftentimes, the information you receive can be geared towards wildly different initiatives and goals. Having the data stored in a single place makes data analysis a breeze for your business. 
• Automation. Modern businesses operate at several levels at once and along multiple axes. It’s easier than ever for crucial bits of information to become lost in translation and result in an issue. ERP software reduces the chance of a costly mistake by automating several time-taking manual tasks, such as payroll, reporting, and order processing. It also eliminates the possibilities of data duplication and allows your team to focus on more crucial and complex tasks.
• Consistent user interface. With ERP, a consistent user interface (UI) and familiar user experience (UX) increase the adoption rate of the software across departments. It also eliminates the need for training, and users are able to easily navigate the software when switching between departments for any data.

Benefits of ERP

ERP systems are wide-reaching in scope and can afford an incredibly varied list of benefits to a business that chooses to implement one into its workflow. 

• Increase productivity. ERP ensures that information is quickly and easily available at all levels. It prevents mistakes that could arise from a lack of version control, allowing teams to make quick, effective decisions with reliable information. 

• Ensure transparency. Having your organization’s data stored in a single, accessible location does wonders for an informed workforce, ensuring the transparency of your operations. With key points of information so readily available, it fosters an environment where every company member can clearly conceptualize the broader purpose of their work and focus their time and energy on what really matters. 

• Financial management. The wide-reaching capabilities of ERP systems allow for the streamlining of financial data by eliminating the use of multiple systems to collect financial reports from each department. Data silos quickly become a thing of the past under these new strategies. 

• Manage risk. One of the benefits of having so much data in one place is the ability to forecast and evaluate future financial risks to your company. ERP software makes this easier than ever since the wide-scale adoption of the cloud and SaaS delivery methods. 

• Stay compliant. Since many of the companies that make use of ERP software have a presence in several different countries, it’s crucial that they’re able to quickly adapt to and meet the different legal regulatory demands of the areas in which they operate. ERP software almost always has built-in modules to assist all types of businesses in staying up to date on the latest laws and regulations regardless of size or location of operation.

• Track costs. Overhead and direct materials shelling out daily can be complicated to keep track of, especially if you rely on multiple locations for your operations. ERP offers readily available data for each location to help you keep your operating costs within budget. It further saves money by reducing waste and overall operating costs with the afforded boost of efficiency. 

• Monitor profitability. Ultimately, the goal of each software solution employed by your organization should be to impact your business's overall profitability positively. ERP provides a holistic look at all elements of profit, not just the baseline numbers. Seeing exactly where and how losses occur can go a long way toward building a plan for future profit optimization and keeping your business competitive in the coming days. 
• Manage quality. Producing a good or service that goes above and beyond the market standards is crucial in increasing your business's profitability and overall viability. ERP software easily tracks factors that would lead to poor-quality products. It also manages the processes necessary to get the highest quality raw materials through the supply chain and to their designated production point in your business.

Challenges of ERP

Even with ERP being the literal one-stop solution to all organizational problems, software buyers may encounter certain challenges with implementing, maintaining, and selecting the right vendor.

• Selecting the right software. There are a number of ERP software vendors in the market that cater to different industries, specific requirements, and whatnot. This abundance of choices can be very confusing when selecting the best software for your business. Identifying your organizational needs, portfolios, offerings, and client reviews before finalizing any software is a good practice.
• Complexity. ERP systems look after an entire organization’s process, so it’s a given that they’ll be a little complex. It also requires some level of training to operate, which may feel like a daunting task. However, with technological advancements and vendors making the software more intuitive, complexity shouldn’t be as big of a concern.
• Investment.  Although not as pricey as they once were, ERP systems require time and money to implement. The silver lining here is that you can reduce your pricing by choosing a good enough software to fulfill your needs. Several customizable choices and options for small businesses may cost less. 
• Maintenance. ERPs need periodic system maintenance and infrastructure and software upgrades. Traditional systems add the cost of a trained IT team that can look into it. However, a vendor-managed SaaS system takes this responsibility away from the user. It relies on the provider to take care of all updates and maintenance under the fixed subscription price.

ERP implementation 

The most important part of ERP systems is selecting the right one for your business and ensuring it's implemented correctly. Even the cheapest ERP options carry hefty price tags, so a failed implementation or wrong choice at even the very earliest stages can result in a catastrophic amount of wasted resources.

Below are some questions to help guide your thinking when it comes to selecting and implementing ERP software:

• What are your specific needs? Have you identified clear pain points for your business? What answers do they need?
• Which areas must be addressed by an ERP software solution? What are auxiliary concerns that can be discarded?
• Which vendors specialize in fulfilling specific needs?
• What style of implementation is being offered by the prospective vendors? Is that workable for your company?
• Does a prospective vendor offer any services to assist with implementation?

Employing social proof through software review platforms can also be an incredibly effective way to hone down the incredible number of choices to find a solution that is relevant to your business.

G2 has verified user reviews of the leading software solutions on the market to help guide you in your decision-making process. After all, hearing the perspective of someone who has already tackled and solved the problem you are currently facing can be some of the most valuable insight you can find.

So long as you are smart about the choices you make regarding your business’ objective needs and resist the ever-present call to cut costs and reduce spending, you’ll be sure to pick software that works well for you. And if you’re still unsure, many skilled ERP implementation consultants can help you make the right decision for your organization’s particular needs. 

Best ERP systems

Very similar to physical infrastructure, you can’t expect a business with a dated and inefficient system to keep up with the more stringent demands of the market. Implementing an ERP system is how to stay on top of everything and be competitive in the market. 

As mentioned before, ERP is highly customizable as per the needs and size of a business. Whatever business you run, chances are there’s an ERP system that’ll be the best for your operations and workflows.

It's time to manage your resources

ERP systems are large, complex software solutions fit to tackle the many intricate challenges that confront a modern business.

There are dozens of different ways that these tools can impact your business and increase productivity, insight, and cost efficiency. However, it’s crucial to consider exactly how such expensive software can benefit your business and that you spend the appropriate time selecting the best vendor to fit your needs. 

Looking for something a little less complex than a full piece of ERP software? Check out G2’s comprehensive category of accounting software to help you get started managing your finances.